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HMRC internal manual

International Manual

Controlled Foreign Companies: The CFC Charge Gateway Chapter 3 - Determining which (if any) of Chapters 4 to 8 apply: Does Chapter 4 apply?: Conditions A to D: Condition B

Condition B requires that the CFC has no UK managed assets and bears no UK managed risks at any time during the accounting period. An asset or risk is UK managed if:

  • the acquisition, creation, development or exploitation of the asset, or
  • the taking on, or bearing of, the risk, is managed or controlled to any significant extent by way of relevant UK activities.

The meaning of “relevant UK activities” is given as activities carried on in the UK either by the CFC itself (unless through a UK permanent establishment) or by companies connected with the CFC under arrangements which would not, it is reasonable to suppose, be entered into by companies not connected with each other.

These will be activities specifically in relation to the CFC and its assets and risks rather than more generally in relation to the group or those carried out by a UK parent company in its role as shareholder.

Activities carried out by the CFC through a UK permanent establishment (see definition at INTM248100) are excluded. This is consistent with their exclusion from the meaning of “UK SPF” in Chapter 4 (see INTM200200). This is because the determination of Chapter 4 profits follows the same principles of attribution of profits to permanent establishments as would apply if the CFC performed the relevant functions in the UK as part of a trade carried on through a UK permanent establishment. The same result would be arrived at in a more direct way. It is therefore important that the issues relevant to whether the CFC is itself chargeable to Corporation Tax under CTA09/S5 (see INTM262020) are fully considered before those relevant to the CFC charge gateway.

It would generally be reasonable to suppose that arrangements would be entered into by unconnected companies where there is evidence that similar arrangements actually exist between such companies. However, any claim that unconnected arrangements are similar should be considered critically as arrangements between connected companies often have characteristics that arise from the group dynamic and would not be present at arm’s length.

The expectation is that Condition B will not met where the nature of services or degree of control, involvement or access to information required is such that it would be reasonable to assume that such support and/or services would not have been provided by or given to an unconnected person (ignoring for these purposes the possibility of a joint venture where the dynamics of the relationship may be different).

It will generally be reasonable to suppose that arrangements would not be entered into by unconnected companies where one company’s financial risk or its prospect of profit is dependent upon decisions made in the other and where the first company is not able effectively to monitor and if necessary reverse decisions made by the other company.

But not all activities carried on in the UK under arrangements that would only be found between connected group companies will be activities caught by the meaning of “UK managed”. An example of this might be where a UK company sets parameters according to which the business, or some part of the business, of overseas group companies must be conducted. As long as active decision making in respect of the asset or risk does not take place in the UK, the fact that management is carried out within general parameters or guidelines set in the UK would not by itself be sufficient to justify a conclusion that the CFC’s assets or risks are “UK managed”. However the fact that significant decision making is taking place in the UK may be an indication that UK relevant activity extends beyond governance or the setting of general group parameters and any assertion that activities only amount to overall governance should be considered critically.

Where guidance or advice on specific matters is given to a CFC from the UK, it will be important to consider the skills and capacity of the CFC’s staff to understand and evaluate this guidance and to make appropriate decisions that take account of it.

A UK company’s overseas subsidiaries may also be required to follow a particular operating model or perhaps to adopt group branding. The provision to a CFC of the use of UK held intangible assets of this kind may not in itself constitute UK management of assets and risks, as long as the value of those assets to the UK holder is not reduced as a result (see INTM200840 and INTM225000).

It should be noted that the words “managed or controlled” as used in this section are not intended to have the particular meaning of similar words in the test of “central management and control” for determining company residence (see INTM120060). The meaning of the words in that test has developed through case law specifically in the context of residence. Nor should their meaning be taken to be synonymous with that of “significant people functions” or “key entrepreneurial risk-taking functions” which are used in Chapter 4 (see INTM200200). Instead they should be read in the context of the purpose of TIOPA10/S371CA, which is to allow for easy identification of companies that would be self-supporting without the benefit of the UK activities, so that their profits will not pass through the gateway to be charged as Chapter 4 profits.

If Condition B is met, it is not necessary to consider any other Conditions or Chapter 4.

If Condition B is not met because the CFC does have UK managed assets or risks, Condition C should also be considered (see INTM197330).